Contract of Employment

The Fair Work Ombudsman (FWO) has published the results of their audits into sham contracting that was conducted across three industries around Australia.

The audit into sham contracting was launched in response to a number of complaints the FWO received from both employee and employer groups, as well as politicians.

The audits began in April 2011 and targeted cleaning services, hair and beauty and the call centre industries, with businesses across all jurisdictions the focus of the investigations.

These specific industries were targeted because of the high number of contractors engaged by businesses within those industries.

Although this audit focused on three specific industries that does not mean that the FWO will not be targeting any other industry in the future. The FWO believes sham contracting is an issue common among ALL industries, ALL businesses, in ALL States and Territories. This means your business could be

Sham contracting is defined as instances when an employer misclassifies a worker as an independent contractor instead of an employee to avoid having to pay employee entitlements such as annual leave or minimum rates of pay.

Misclassifying employees could result in breaches of the National Employment Standards (NES) of the Federal Fair Work Act 2009 and minimum wage entitlements, as well as contraventions of provisions in Modern Awards or Enterprise Agreements. In addition, misclassification could also contravene pay slip and employee record requirements.

In instances of sham contracting, the element of intent is important. Employers generally have to have knowingly or recklessly failed to classify workers appropriately to purposely deny them employment benefits and protections in order to contravene the sham arrangement provisions of the Fair Work Act 2009.

Who is targeted in these audits?

The FWO adopted both a random and targeted selection process for the sham contracting investigation. Certain businesses were especially chosen to be included because of the following:

  • their past history where a problem may have occurred;
  • previous investigations;
  • referrals from previous campaigns such as the National Cleaning Services Campaign;
  • analysing employment website searches; and
  • instances where Letters of Caution were issued.

Businesses selected because of past issues may not have been problems regarding sham contracting, but may have had other issues or breaches in the past that the FWO may be aware of, such as non-compliance with record-keeping requirements.

What is the audit process?

There are a number of phases to an audit undertaken by the FWO. The process is conducted in the following order:

  • employers receive a letter informing them of the audit, along with a request to submit records to the FWO;
  • a spokesperson for the business is interviewed and their responses are recorded (this generally takes place at the business’ premises);
  • if employer’s do engage contractors, Fair Work Inspectors will visit the business’ premises and will interview either all or a few contractors (it is not compulsory for contractors to participate);
  • if contractors refuse to take part, the FWO will make their assessment based on the available information and documentation provided; and
  • the final determination is made based on interviews, documents and information collected throughout the investigation.

What did the FWO find?

The report shows a total of 102 businesses were audited as part of this sham contracting investigation. However, out of this number, 11 did not hire independent contractors or were employee-only enterprises.

The findings show that of the remaining 91 businesses, a total of 21 had misclassified their employees. However, the majority of these did not deliberately do so and many of these employers have since voluntarily fixed the breaches.

A third of employers who had misclassified their employees did so intentionally and are therefore suspected of breaching the sham arrangements outlined in the Fair Work Act 2009.

What are the penalties?

The FWO can pursue a number of different courses of action. In cases where employers did not intentionally misclassify their employees or enter into sham contracting, then they have generally either been formally cautioned or asked to undertake education or training initiatives. Despite the genuine mistake, these employers may still be included in future audits to assess their ongoing compliance.

For employers who were deliberately disguising employment relationships, the FWO is considering pursuing litigation.

What will the FWO do now?

The FWO has announced that the cleaning services industry will remain the focus of ongoing regulatory campaigns, including future audits.

From the investigation into sham contracting, the FWO has also concluded that the issue is common and is prevalent in other industries aside from the three targeted in the initial audit.

As a result of the findings, it is recommended that businesses who engage independent contractors for a long period of time need to periodically review the nature of the employment relationship.

Need help classifying your people?

For advice on how to correctly classify employees, contact the Business Advisory Centre on 08 8300 0101.

Adelaide Office

Level 1
136 Greenhill Road Unley
South Australia 5061

P 08 8300 0000
F 08 8300 0001



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